Background
Whose fault was it?
Comment


The former directors and officers of Northstar Aerospace (Canada) and Northstar Aerospace Inc (together, Northstar), are facing significant personal liability for environmental remediation costs in respect of a contaminated industrial site owned by Northstar Canada. The liability has arisen following a failed restructuring that Northstar attempted to effect under the Canadian Companies' Creditors Arrangement Act.

Background

Northstar Canada manufactured helicopter and aircraft parts on an industrial site in Cambridge, Ontario until April 2010. In 2004 Northstar informed the Ontario Ministry of the Environment of potential environmental contamination around the site. The contamination was significant. Northstar's operations had involved the use of industrial solvents, including trichloroethylene (TCE), a carcinogenic. The contamination at the site had migrated to the soil and groundwater beneath the adjacent residential neighbourhood.

From 2004 to 2012 Northstar Canada carried out investigations, mitigation and remediation at the site on a voluntary basis. In addition, Northstar Canada created an accounting reserve of C$22.8 million for environmental testing and remediation at the site. In the eight years preceding the Companies' Creditors Arrangement Act filing, Northstar Canada had paid approximately C$20.4 million towards that reserve. In early 2012 the ministry became concerned as to Northstar Canada's financial ability to continue its remediation efforts. As a result, shortly before Northstar's filing, the ministry issued two orders requiring Northstar to:

  • continue carrying out the monitoring and remediation work (the March 15 order); and
  • provide financial assurance in the amount of C$10 million to fund the environmental remediation (the May 31 order).

On June 14 2012 Northstar and certain subsidiaries were granted protection under the act. Northstar had insufficient funds to pay the C$10 million contemplated by the May 31 order. However, after the filing Northstar continued to comply with the monitoring and remediation activities contemplated by the March 15 order to the extent it was permitted to do so under the order granting Northstar protection under the act.

On August 2 2012 Northstar Canada was adjudged bankrupt. Shortly thereafter the trustee in bankruptcy disclaimed its interest in the site and the ministry subsequently took over the remediation activities.

During the Companies' Creditors Arrangement Act proceedings, the ministry had pursued various means of holding Northstar responsible for the environmental clean-up costs. These efforts were largely unsuccessful and in November 2012 the ministry issued orders against the former directors and officers of Northstar, requiring them to fund the environmental remediation personally, at a cost estimated to be approximately C$15 million (the D&O order). The directors and officers have appealed the D&O order to the Environmental Review Tribunal (ERT).

Section 18 of the Environmental Protection Act (Ontario) grants the ministry broad powers to require any person who currently owns, manages or controls property from which a contaminant has been discharged, and also those who have previously held such authority, to undertake a variety of remediation activities. The ministry argues that the former officers and directors had management and control of Northstar from period 2003 to 2012 and were aware of the environmental issues arising from the contamination.

Whose fault was it?

The difficulty facing Northstar's directors and officers was that it was unclear what they could have done differently in the circumstances. The ministry, as set out in the D&O order, did not allege that the directors and officers had any personal involvement in the contamination or that they were negligent in their duties. Instead, it claimed that they should have set aside funds to pay for the remediation work in a special trust account before the Canadian Companies' Creditors Arrangement Act filing. The issue with this assertion is twofold. First, the directors and officers could not have set aside such funds as Northstar was facing a severe liquidity crisis and simply did not have the money available. Second, had they set such funds aside in a trust for the purposes of funding the clean-up, the transfer of funds would have been subject to attack by the company's creditors or the trustee in bankruptcy as a fraudulent preference. If it was found to be a fraudulent preference, the transfer would have been void and the funds made available for distribution among Northstar's creditors, in accordance with their respective priorities.

While solvent, Northstar met its environmental remediation obligations as required and there is no assertion on the part of the ministry that the directors were negligent or willingly caused the pollution. In fact it was Northstar that informed the ministry of the potential pollution when it became aware of it in 2004 and before the ministry orders. While it was still solvent, Northstar undertook all investigation, mitigation and remediation programmes on a voluntary basis. It had implemented an approved remediation plan in an attempt to reduce the TCE vapour intrusion, as well as the extent and concentration of the TCE contamination in the groundwater. These remediation efforts continued during proceedings under the Companies' Creditors Arrangement Act. However, Northstar's debtor-in-possession lenders indicated they would not fund the remediation activities after the closing of the sale transaction, pursuant to which the bulk of Northstar's assets were sold to a third party

The ministry took issue with the fact that there was no provision for the continuation of the remediation after the sale transaction was closed. However, the reality – as noted by the court – was that no bidder that expressed an interest in the assets of Northstar was willing to purchase the site, either on its own or together with other Northstar assets. Pursuant to the Companies' Creditors Arrangement Act, the ministry has super-priority security over the site for the costs of the remediation. However, without interested purchasers, this priority is worthless.

Even if the directors and officers had not undertaken to sell the assets, Northstar would have no practical ability to comply with the ministry orders. As noted by the court, if the sale transaction did not close, Northstar's senior secured creditor would have proceeded to enforce the security interest it held over the assets of the company, which security interest ranked in priority to the ministry (with the exception of the contaminated site). The result would have been that even if the directors and officers did not seek to sell the bulk of Northstar's assets, upon the enforcement of its senior secured lender's rights, Northstar would have no assets available to fund compliance with the ministry orders and no ability to comply with same.

Comment

The appeal of the D&O order remains outstanding. However, unless it is reversed, the case will serve as an alarming example for all directors and officers of companies operating in Ontario of their potentially enormous personal liability for environmental damage caused by their company's operations, even where there is little or no evidence that they have done anything wrong. So long as a company is solvent and able to pay its liabilities, including its environmental remediation obligations, the directors and officers presumably have little to worry about. However, if the ministry looks to the governing minds of the company to pick up the tab for environmental remediation efforts once a company enters the zone of insolvency, it is not clear what directors and officers can do to meet their obligations to the company and under the Environmental Protection Act.

In circumstances where a company undergoes a formal restructuring, pursuant to the Companies' Creditors Arrangement Act, a plan of arrangement or compromise with the company's creditors can include terms providing for the compromise of claims against directors personally that relate to the company's obligations. However, if – as in Northstar – there is no compromise or arrangement, any personal obligations the officers and directors may have under the Environmental Protection Act are not compromised by the Companies' Creditors Arrangement Act and remain fully enforceable against them.

For further information on this topic please contact Sara-Ann Van Allen or Ken Kraft at Heenan Blaikie LLP by telephone (+1 416 360 6336), fax (+1 416 360 8425) or email (svanallen@heenan.ca or kkraft@heenan.ca).

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